Monday, September 29, 2014

Regulatory Capture-- A Story Of Democratic Dysfunction In The Face Of Increasingly Unfettered Capitalism


This is far more true today than it was in 1902

Last week's most important story wasn't that mini-states Belgium, the U.K. and Denmark are joining in the bombing of airforceless ISIL-- or even the birth of Charlotte Clinton Mezvinsky. The biggest news was broken by Ira Glass on NPR's This American Life. That one and change long YouTube at the bottom is the entire show but I suspect NPR will persuade Google to take it down so… if they do, you can listen to it here too and you can read the transcript here. And remember as you listen to one outrage after another, the Fed refused to speak on the record except to send a short comment saying that begins with "The New York Fed categorically rejects the allegations being made about the integrity of its supervision of financial institutions."

The story is about a Fed whistleblower, attorney Carmen Segarra-- and impressive compliance officer with degrees from Harvard, Cornell and Columbia-- who secretly recorded 46 hours of interaction between crooks at Goldman Sachs and the regulators who systematically are programmed to let them get away with it. Her goal was to expose the sickening deference by Fed regulators to the banksters that were supposed to be overseeing. A report the Fed commissioned in 2009 had already shown that there were a whole rang of alarming problems that had to be dealt with and weren't being addressed. In Glass' words, "what they found were a whole range of problems, all of them distressing to read about. They found deference to the banks, they found an unwillingness to take action, extreme passivity, and they found what experts call 'regulatory capture.' Regulatory capture is when a regulator gets too cozy with the company he’s supposed to be monitoring. He’s a watchdog who licks the face of an intruder, and plays catch with the intruder, instead of barking at him." The report shows how ineffective the Fed had become "And," says Glass, "one of his recommendations was to hire a new kind of employee: outspoken, unafraid, somebody who would not get captured" (i.e., Carmen Segarra). Her recordings, asserts Glass "raise serious questions about whether the Fed has changed enough since 2008 to protect us from another financial disaster."

Segarra's stint at Goldman for the Fed started with a comment from a Goldman exec saying that "once clients were wealthy enough, certain consumer laws don't apply to them," which Goldman denies was said and then claims the exec didn't really mean it. Early into the job the top Fed regulator at Goldman, a captured whore for the bank named Mike Silva, warned her that if she made waves, she'd be "frozen out" of the Fed. He also told her everything between the Fed and Goldman depended on perception rather than reality. She was stunned. Keep in mind that "employees of the Fed do go to work for banks. A quick Internet search reveals at least seven former Fed bank examiners who now work at Goldman. They include the colleague who, according to Carmen, asked her to change her meeting notes."
Carmen says she was so shaken by these incidents-- someone telling her she didn’t hear something she knew she heard, another colleague asking to alter minutes that Carmen believed were accurate, and then the Fed’s top guy at Goldman telling her that perceptions are more important than reality-- she says it was like reality itself was being questioned at the Fed. She realized she wanted a clear record of what was really happening in case there were ever any disputes about it. So she went to the Spy Store, bought a tiny audio recorder, put it on her keychain, and started switching it on secretly at important meetings.

…Segarra: "[T]hey were all sort of afraid of Goldman and I think they were a little bit confused as to who they were working for. What I was sort of seeing and experiencing was this level of deference to the banks. This level of fear. And just not really showing a lot of interest in putting two and two together."

According to Beim’s report, this culture of fear paralyzed the Fed in the years leading up to the financial crisis and prevented it from taking action. It’s not that the Fed regulators didn’t notice the problems accumulating in the financial system that eventually brought it down.

David Beim: "So I could just read the fear of speaking up list of quotations. And it goes like this: 'Don’t want to be too far outside from where management is thinking. The organization does not encourage thinking outside the box. After you get shot down a couple of times, you tend not to go there anymore. Until I know what my boss thinks, I don’t want to tell you.'"
Silva eventually summarily fired Segarra for forcing the Fed to confront the very inconvenient reality that Goldman, on of the most conflicted "legalistic" criminal enterprises in history had no conflict of interest policy. Silva-- the literal definition of regulatory capture, left not long afterwards and went to work for GE Capital. Segarra is suing the Fed and Silva for wrongful termination. Writing for Fortune Shawn Tully reported that Segarra says her spineless bosses at the New York Federal Reserve stymied her efforts to reform what she regarded as the storied institution’s rampant conflicts of interest and that is why she was fired. Those spineless bosses are still saying they "categorically reject the allegations being made about the integrity of its supervision of financial institutions."

I wonder if the Fed regulators would work better if they were incentivized with a percentage of the fines they got out of the criminal banksters. Or firing squads.

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At 11:07 AM, Anonymous Anonymous said...

Once again, we have some juicy details about a general situation we already accept as standard operating procedure.

Does Ira Glass / NPR have any suggestions how to fix this problem?

John Puma


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